Forecast Errors in Budget 16 Highlight Fiscal Risks for 2017

This blog has argued that Ireland should not have moved its Budget date from December to early October, as it increases the risks of  forecasting errors, which history shows can be large. That was again evident in 2016, but what is also revealing, and perhaps ominous, is that the final fiscal outturn was also very different to that expected less than three months earlier, making the 2017 targets more challenging than initially thought.

The 2016 Budget envisaged the State running a current budget surplus of €0.5bn, offset  by a capital deficit of €2.1bn , so leaving a borrowing requirement of €1.6bn. Current spending was projected to rise modestly, by 1.6%, and tax receipts were forecast to increase by 3.6%: Corporation tax had spectacularly exceeded the target in the previous year , by 50%, and was now expected to decline modestly. but offset by stronger tax headings elsewhere, notably from VAT, which was projected to grow by 7.7%.

As the year unfolded  it became clear that tax receipts were running well above profile and by end-June were €740m or 3.4% above expectations, with corporation tax again well ahead of target, accompanied by excise duties. VAT was running behind profile but over the summer the Department of Finance projected a new tax outturn for the year, with receipts now expected to be €900m above the original figure,  partly offset by higher current spending. These new projections were again reiterated in October, with the current budget surplus now expected to emerge modestly higher at €0.7bn , with the overall deficit slightly lower than originally projected, at €1.4bn.

That earlier tax buoyancy fell away in the latter part of 2016, however, and tax receipts came in over €600m ahead of the original target but well shy of the €900m overshoot pencilled in. Indeed,  by end- December, most tax headings fell short of the forecasts made only a few months earler, including VAT (-210m) and Corporation tax (-€150m). Furthermore, current spending actually finished the year below the original target and a full €550m below the higher figure announced over the summer, so the government could not spend all it hoped.

Non-tax revenue also emerged well away for the revised target, this time to the upside, and the net effect was a current budget surplus of €1.3bn, some €0.8bn above the original Budget target and €0.6bn ahead of the forecast made a few months ago. The capital deficit was slighly higher than forecast, leaving an overall deficit of €1bn.

So the forecast errors in 2016, as in 2015, came in on the ‘right side’ , resulting in a smaller than expected deficit, but  implying that the Government could have spent more than it had initially thought, while  still hitting the fiscal targets. The forecast errors can also be on the ‘wrong side’ of course,  and the 2016 outturn   now means that tax receipts have to grow by 5.8% to reach the 2017 target, instead of 5.2%, with the required rise in VAT now 7.7% ( was 5.9%) and 5.0% for Corporation tax ( was 2.9%). The 2017 fiscal arithmetic therefore looks more challenging than it did when the Minister presented the Budget just a few months ago.